A banks financial statements are quite

different from those of a firm in any other

industry.
In their roles as financial intermediaries,
banks have to take considerable financial
risks, and their financial statements merely
reflect these risks
 LIABILITIES ASSETS
capital cash and balances
with Central bank
reserves
balances with
deposits banks and money
borrowings at call
other liabilities and investments
provisions loans and
advances
fixed assets
other assets
 Analyze any banks balance sheet
What are the striking features?
What constitutes bank liabilities? What are
their features?
What constitutes bank assets? What are their
features?
What are the risks of having this type of
balance sheet?
 Major asset in banks balance sheets
Major source of revenue for banks
Operational features - different loan
covenants, maturities, interest rates,
repayments amounts and modes,
currencies,industries, purposes etc
 Help to earn interest
help to meet liquidity needs
low transaction costs
speculate on interest rate movements and
profit on price changes [trading ]
part of banks dealer functions - at
purchase, objective to be designated - held-
to-maturity, trading or available for sale
 Vault cash
deposits with Central bank [reserve
requirements]
deposits with other banks
cash items in the process of collection [float
funds]
 Depreciated value of banks premises and
equipment
interest accrued [receivable]
prepaid expenses
non banking assets acquired in satisfaction of
claims
Savings and demand [current] deposits
no set maturity
low / no cost
Time deposits
set maturity - short term / long term
deregulated interest rates
 From the central bank
Other banks / FI s
Commercial paper
Bonds
Other long term borrowings
Borrowings abroad
 This is an off balance sheet item
It signifies a possible obligation that
depends on the occurrence of some uncertain
event.
In good times, contingent liabilities can
generate substantial income for banks
To ascertain banks financial condition,
contingent liabilities will have to be analyzed
 INCOME EXPENSES
interest earned interest paid
[advances, [deposits, RBI/inter
investments, bank borrowings]
balances with RBI operating expenses
& other banks] provisions
other income taxes
[commission,excha
nge,profit on
exchange etc]
 How is bank income computed?
What are the components of bank income?
What are the components of bank expenses?
What are the variables banks net income
depend on?
What are the risks that could impact bank net
income [profit]?
 NI [Net Income]=Net Interest Income-
Burden- Provisions+/- Gains from
investments-Taxes
The banks strategy can be inferred from
the contributory factors to net income
Some commonly used profitability measures:
NIM= NII/ EARNING ASSETS

Spread= Percent yield on interest earning assets

less percent cost on interest bearing funds
Burden ratio= non interest income/non interest
expense
Efficiency ratio= non interest income/ net total
income
Schedule Liabilities Schedule Assets
06 Cash and bank
01 Capital balances with RBI

02 Reserves and 07 Balances with

surplus banks and money
at call
03 Deposits 08 Investment

04 Borrowings 09 Advances

05 Other liabilities & 10 Fixed assets

provisions
06 Contingent 11 Other assets
liabilities
Schedule Income Schedule Expenses

13 Interest 15 Interest
earned expended

14 Other income 16 Operating

expenses
17 Provisions
and
contingencie
s
 To ensure transparency in operations and
financial condition, banks have to disclose
substantial information to stakeholders in
Notes to accounts
RBI specifies the list of such disclosures from
time to time
 Traditional models of bank performance are
based on the Return on Assets [ROA]
approach.
Some others such as CAMELS rating models
follow a rating approach based on various
parameters.
There are also more sophisticated models
based on risk rating criteria
 CAPITAL ADEQUACY
ASSET QUALITY
MANAGEMENT
EARNINGS
LIQUIDITY
SENSITIVITY TO MARKET RISK
1 TO 1.4 SOUND
OVER 5- RISKY